Author: Massimiliano Passalli
The Standard and Poor’s 500 (S&P 500) is one of the most recognized stock indexes in the world, tracking the performance of 500 publicly traded U.S. companies. These companies are weighted by market capitalization, meaning that larger companies have a greater influence on the index. Moreover, the S&P 500 is regarded as one of the best indicators of American equities’ performance and the stock market overall. While investors cannot directly invest in the S&P 500 (since it is just an index), they can invest in index funds offered by major asset managers such as BlackRock, Vanguard or State Street Corporation. These funds mirror the performance of the S&P 500 by buying shares in the companies included in the index. Historically, the S&P 500 has delivered an average annual return of 11%, dividends included. Over the last decade, the index averaged a 13% annual return. It is also up 22.5% year-to-date and 38.7% over the past year (as of October 2024). However, many analysts fear that the good times might be over. Goldman Sachs recently released a report projecting a mere 3% annualized return for the S&P 500 over the next decade. The report goes even further, predicting a 72% probability that bonds will outperform the S&P 500 for the coming decade and a 33% chance that the index could lag behind inflation through 2034. Goldman’s view is not unique, BlackRock, Vanguard and other companies have also cautioned about future equity returns. The main reason for this pessimistic view is the index’s unusually high concentration of large tech companies, including giants such as Nvidia, Microsoft, Apple and Amazon. These firms have driven much of the S&P 500’s great performance over the last decade, but their weight also makes the index more sensitive to fluctuations in the technology sector. Since Goldman does not believe that these tech giants can sustain the same level of growth we have seen in recent years, they expect returns to be very low moving forward. Nonetheless, while there is merit to Goldman’s argument about market concentration and valuation, it is also true that prominent Wall Street figures have been pointing towards high valuations for years, but the S&P 500 still had a terrific rally. Therefore, while there should be caution moving forward, long-term estimates are very hard to formulate and are very often not accurate. For these reasons, many companies and investors do not agree with this pessimistic point of view, believing that the S&P 500’s bullish trend may continue.